New real-estate fad: the all-cash head fake

More wealthy home buyers are closing before financing

By

AnnaMariaAndriotis

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Pay cash for your next home or get a mortgage? Some wealthy home buyers are choosing both.

It’s called delayed financing, in which buyers pay cash for a home and then take out a mortgage soon after closing. Rarely used even two years ago, experts say it has picked up over the past 12 months.

The practice is growing mostly in affluent coastal housing markets, including New York and San Francisco. And it all boils down to competition. Sales of million-dollar-plus homes are on the rise nationwide, while inventory remains limited. All-cash buyers have a better chance of standing out from competing bids and getting the home at a lower price since their offer isn’t contingent on financing.

After the deal is done, these buyers also want to regain some liquidity. So they get a mortgage and, in some cases, stash this money in investments that might have higher returns than what they pay in mortgage interest. Other options: They might use it to purchase another property or to simply bolster their cash cushion.

In July, William Martin and his wife closed on a 6,500-square-foot home in Diablo, Calif. Sensing that there was a lot of buyer demand for it, the couple gave a competitive offer: all cash, at slightly above the $1.785 million asking price. Those funds came from a mix of savings and money from his father-in-law and a friend, who were paid back a few months later when the Martins got a delayed-financing mortgage from Fremont Bank, a community bank in San Francisco. “That’s what helped me make the decision to go forward with the purchase from the beginning,” Mr. Martin says.

Delayed financing is similar to a cash-out refinance—in which a borrower with a mortgage also takes equity out of the home. But cash-out refis may require waiting a few months or longer to execute, says Keith Gumbinger, a vice president at mortgage-info website HSH.com. Rates and fees can also be higher, partly because of the extra legwork involved transitioning from an existing loan to a new one. Conversely, buyers who apply for delayed financing can be considered as early as the day after they become the new homeowner, since they own the property free and clear.

Still, not all delayed-finance options are alike. Some lenders, including Wells Fargo
WFC, -0.43%
and Fremont Bank, say they charge the same interest rate and fees on this mortgage as they would if the borrower applied while buying the home.

Other lenders charge a rate somewhere between a regular mortgage and a cash-out refi rate, which can be higher. National lender EverBank
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says its delayed-financing rates are often about one-eighth of a percentage point higher than regular mortgages. Community bank Grand Rapids State Bank, based in Grand Rapids, Minn., says rates can be 10 to 30 basis points—or 0.10 to 0.30 percentage point—higher than on a regular mortgage. Noah Wilcox, the bank’s president and CEO, says the higher rate often influences buyers to sign up for the more affordable purchase mortgage upfront. “When you talk about $1.5 million, that can add up quickly,” he says.

Here’s what to consider regarding delayed financing:

Loans types vary. For delayed-financing applicants, many lenders provide a regular mortgage, but some offer pricier alternatives, like a home-equity loan or a home-equity line of credit. Their rates average 6.44% and 5.06%, respectively, according to HSH.com. In contrast, rates on 30-year private market jumbo mortgages average 4.03%.

Limits on equity withdrawal. In many cases, homeowners will need to keep at least 20% to 25% equity in their home after withdrawing funds. Separately, the lenders mentioned here offer loans that run into the millions via delayed financing. But some lenders don’t, instead capping out at lower limits set by the government. That’s $417,000 in most parts of the country but can run up to $625,500 in some pricier metro areas. By keeping to those limits, lenders can try to sell these loans to Fannie Mae
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and Freddie Mac
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.

Thorough underwriting. In most cases, lenders check applicants’ credit scores and tax returns—and they also ask for copies of statements that show where the funds to buy the home came from, a copy of the wire transfer, and the receipt for the home purchase. Lenders say they do this partly to screen out buyers who might try to hide money or who are involved in transactions that help sellers evade taxes on the sale.

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